Europe's Contribution to the Global re(im)balancing act

I am obviously going against my own preachings with this one in the sense that the discourse treats Europe as one single economic entity with one balance of payments. This is obviously very difficult in its own right but it would admittedly make sense if we were dealing with homogenous countries in the Eurozone/Europe. This, I am afraid, is far from the reality which makes my initial point very important ...

Global trade imbalances matter and the unwinding of them merits due discussion and analysis; once again Brad Setser is a must read here. However, the extent to which Europe as a region is going to contribute to the balancing process (boost global demand growth through imports (trade deficits)) cannot be hinged on looking at Europe as one single economic entity. European countries are not going to run trade deficits and surpluses in unison and as such the idea that Europe pulls as one economy in terms of amending global imbalances is not feasible. However, Europe has, for all it is worth, been running an overall trade deficit on the back of primarily France, the UK and Spain. In terms of the big surplus countries we are most notably talking Germany but also Italy who will need to run a surplus in order to grow as consumer speding continue its downward course.

So what about my headline then? Well, Europe's trade gap with notably China and Japan is actually widening measured by the first eight months of 2006, but interestingly enough the septemeber data shows that the overall European trade deficit is waning which suggests that demand in Europe for foreign goods perhaps is cooling off going into 2007. In any case as the numbers show (118.5 billion in exports and 119.4 billion) we are talking about an overall very limited contribution to global demand growth. Furthermore, if the current growth composition from september continues Europe will soon all things equal be looking at an overall surplus. Meanwhile, all the talk about China's growth being based on internal consumption also seems a bit weird with a widening deficit with both Europe and the US at the same time.

(From Bloomberg - bold parts are my emphasis)

Europe's trade deficit with China widened to a record in the eight months through August as the Asian economy is poised to overtake the U.S. this year as the second-biggest source of imports to the euro area.

Imports from China to the dozen euro nations rose to 88.3 billion euros ($113 billion) in the first eight months of the year, up 21 percent from the same period a year earlier, the European Union's statistics office in Luxembourg said today. The trade deficit with China grew 21 percent to 55.1 billion euros.

The growing trade gaps with China and Japan, Asia's largest economies, have prompted European finance chiefs to urge authorities in Beijing and Tokyo to let their currencies appreciate, calls that may be reiterated at this weekend's summit of finance officials from the Group of 20 industrial and developing nations.The yuan has dropped 5 percent against the euro this year and the yen is down 8 percent.

The euro's gains against the yen and the yuan ``have put foreign-exchange themes back on the G-20 agenda this weekend,'' said Roberto Mialich, foreign-exchange strategist at UniCredit Banca Mobiliare SpA in Milan.

French Prime Minister Dominique de Villepin said Nov. 14 that the euro's ``current level is hampering some of our exports.'' The country's president, Jacques Chirac, said two days later other European nations share his government's concern the euro's strength is hurting exports and employment prospects.

The statistics office released the detailed trade data for the first eight months of the year at the same time as it announced the euro area's overall trade deficit fell in September to 900 million euros, adjusted for seasonal variations, from 3.3 billion euros in August. The agency provides an unadjusted breakdown of the statistics with a one- month lag.

European exports increased 2 percent in September to 118.5 billion euros, seasonally adjusted, while imports fell 0.1 percent to 119.4 billion euros, the agency said. The euro area's overall trade deficit may be welcomed by trading partners such as the U.S. who have urged Europe to do more to boost global growth as a way of narrowing international imbalances.

Other European leaders have expressed concern with the yen's drop. EU officials view the yen's fall as ``too rough,'' Luxembourg Prime and Finance Minister Jean-Claude Juncker said Nov. 7.

The yen was little changed after the report, at 151.20 per euro at 11:10 a.m. in Brussels. China's yuan fell 0.2 percent to 10.0571 per euro.

Federal Reserve Chairman Ben S. Bernanke, European Central Bank President Jean-Claude Trichet and Bank of Japan Governor Toshihiko Fukui are among G-20 officials attending the summit in Melbourne, Australia, this weekend. The G-20's members account for about 85 percent of the global economy and 80 percent of world trade.

China's Yuan

In the U.S., officials have criticized China for its refusal to inject much flexibility into its currency. Since revaluing the yuan in July 2005, the government has limited its gains to 2.6 percent, antagonizing lawmakers and companies elsewhere who say it remains undervalued and limits the export potential of their economies.

The U.S. trade deficit with China rose to an all-time high of $23 billion in September from $22 billion in August, the U.S. Commerce Department said Nov. 9. China has come close to replacing Mexico as America's second-largest trading partner behind Canada, the data show.

U.S. imports from China increased to a record $27.6 billion in September, while exports to the Asian nation declined to $4.6 billion.

Apart from Bloomberg the recent Eurostat publication on the Euro trade balances is also worth a quick glance. Obviously, this kind of data crunching gets increasingly more complicated as we grind through to the core of things since the Euroarea seems to be running a surplus (probably driven by the high relative weight of Germany) whereas EU25 as a whole is running a deficit.

The first estimate for the euro area1 trade balance with the rest of the world in September 2006 gave a 2.0 bn eurosurplus compared with +1.3 bn in September 2005. The August 20062 balance was -5.4 bn, compared with -2.9 bnin August 2005. In September 2006 compared with August 2006, exports, seasonally adjusted, rose by 2.0% whileimports fell by 0.1%.

The first estimate for September 2006 extra-EU25 trade was a deficit of 13.4 bn euro, compared with -9.5 bn inSeptember 2005. In August 20062, the balance was -21.3 bn, compared with -14.7 bn in August 2005. In September2006 compared with August 2006, exports, seasonally adjusted, rose by 1.6% while imports fell by 1.7%.

This break-up of coutry specifics is also worth while ...

Concerning the total trade of Member States, the largest surplus was observed in Germany (+100.2 bn euro in January-August 2006), followed by the Netherlands (+22.7 bn), Ireland (+22.0 bn) and Sweden (+11.8 bn). The United Kingdom (- 87.0 bn) registered the largest deficit, followed by Spain (-57.1 bn), France (-24.5 bn), Greece (-22.2 bn) and Italy (-15.9 bn).